STRENGTHS

Development strategy based on openness, upscaling and diversification of the economy

Large available labour force; low wages

Strong agricultural potential and natural resources

Economy unaffected by Chinese slowdown

Potential benefactor of US-China trade war

WEAKNESSES

Shortcomings in the business climate

Lack of infrastructure

Incomplete reform of the public sector

Increasing inequalities

Fragile banking system

Inefficient and indebted SOEs take up 28.4% of capital while representing 0.5% of total number of firms

RISK ASSESSMENT

Growth will remain strong

Growth will remain robust in 2019, after reaching its fastest pace in eight years during 2018, carried by the continuous shift of labour from agriculture to more productive sectors (manufacturing and services). While public investment is subject to budget constraints, private investments – both foreign (FDI) and domestic, in industry and construction – will be dynamic. Domestic demand will be strong, supported by the tourism sector (7% of GDP in 2017), the growing middle class, increasing wages, and rising urbanisation rates. Inflation is set to remain at the upper limit of the authorities’ target, partly due to higher oil prices. Exports are expected to continue to perform strongly, especially with increasing participation in international trade agreements (ASEAN, the FTA with the EU, the FTA with South Korea and CPTPP). Growing integration in global value chains could also be spurred in the context of US-China trade war, as Vietnam is a good alternative to China for export-oriented manufacturing thanks to the availability of a low-cost labour force and the country’s participation in trade agreements. Moreover, Vietnam is moving upmarket, including in electronics, with the production of some smartphone and tablet components. Electronics, machinery, footwear, and clothing are the main export industries. Due to aforementioned reorientation of the workforce and the economy, the agricultural and oil segments will likely be much less dynamic than the service and manufacturing industries.

Public accounts remain poor; maintained current account surplus

The budget deficit will remain high in 2019. It will be smoothed by both increased tax revenues, thanks to the implementation of reforms of the tax administration system, and by receipts from the privatisation of SOEs (partial divestment from 181 SOEs planned for 2018 and 62 for 2019). Reluctant to fully privatise, the state is expected to maintain a 33% stake (the amount needed for veto powers) in profitable or strategic companies. FDI is needed to finance infrastructure projects within public-private partnership frameworks (notably in transport and energy). Public debt will slightly decrease, remaining just below the debt ceiling set by Parliament (65% of GDP). Almost all of public debt has medium or long-term maturity, but it will remain vulnerable to currency risk, as it is largely denominated in foreign currencies (around 40%), while public and publicly guaranteed external debt has risen to around 50% of GDP.

The goods surplus is carried by manufactured goods exports, notably the increasing share of higher value added electronic components exports, and the service surplus by IT outsourcing and tourism. The exports outlook is made brighter by the trade war on tariffs, which could be the start of a reshaping of global value chains. These performances will continue to be offset by imports of intermediate goods, while the income balance should remain heavily in deficit, despite expatriate transfers (mainly from the United States).

Foreign reserves increased thanks to FDI and portfolio investments in recent years, but the central bank’s interventions to fend off pressures on the crawling peg to the US dollar (2.5% depreciation in the first half of 2018) are maintaining them at an insufficient level (2.5 months of imports in late 2018). Pressures will linger in a context of tighter global liquidity and appreciation of the US dollar to emerging countries’ currencies, although Vietnam is expected to be less exposed to sharp net outflows than some neighbours. The banking system will remain fragile as it is undercapitalized and heavily dollarised.

Domestic stability, but geopolitical tensions

The Communist Party of Vietnam (CPV) controls the political, economic and social life. Political repression is increasingly targeting internet activists. President Tran Sai Quang passed away in September 2018, but this will not affect stability as he will be replaced by Nguyen Phu Trong, the general secretary of the CPV. The presidential role is mostly ceremonial, but it should be noted that Mr Trong will be the first person since Ho Chi Minh to hold those two positions. Domestic policy will continue to target corruption and a lack of transparency to increase attractiveness for foreign investors: Vietnam is ranked 68th out 190 countries in the 2018 Doing Business ranking by the World Bank.

The sovereignty dispute in the South China Sea will continue to weigh on diplomatic relations with China. Vietnam continues to risk triggering Chinese reaction with new oil and gas production sites near disputed waters to answer its output shortfall. In July 2017, Vietnam began drilling in disputed waters in partnership with a Spanish company. China warned that it was ready to attack the facilities if they were not dismantled. Explorations were ended. In July 2018, the state-owned PetroVietnam signed another deal to start drilling with a Japanese company near Chinese-claimed waters; at the time of writing, this has yet to trigger a Chinese reaction. Vietnam will pursue its efforts to strengthen economic, political, and military ties with regional powers such as Japan and India, but also with the United States. In addition, the country is part of the CPTPP that will come into force in 2019.